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Yet another selling frenzy in Chinese technology stocks:
Chinese technology stocks have suffered brutal selling pressure for weeks. The amount of internal damage is severe enough to rank among the worst since 2007 on several metrics. Similar behavior tended to precede at least multi-week rebounds, with a few morphing into long-term turnarounds.
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Research
By Jason Goepfert
BOTTOM LINE
Chinese technology stocks have suffered brutal selling pressure for weeks. The amount of internal damage is severe enough to rank among the worst since 2007 on several metrics. Similar behavior tended to precede at least multi-week rebounds, with a few morphing into long-term turnarounds.
FORECAST / TIMEFRAME
None
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Key points:
- Chinese technology stocks have suffered a brutal couple of weeks of selling pressure
- Half the stocks have plunged to 52-week lows, and internal momentum is nearing worst-ever levels
- After similar behavior, investors have typically let up on selling for a couple of weeks, at least
Investors give up - again - on Chinese tech
It seems like we have occasion to do this twice every year, and this one is starting early. It's time to talk about the plunge in Chinese technology shares.
In mid-March 2022, we looked at one of the most stunning displays of overwhelming distaste for any sector or any market we've ever looked at. At that time, there were simply no buyers for Chinese tech stocks, and more than 90% of them fell to a 52-week low.
By May of last year, these stocks were showing signs of heavy selling pressure again, but it wasn't to a level that we could consider extreme for such a volatile group. It's getting there now.
In the past week, selling pressure reached the baby-and-bathwater level again, and half the stocks sank to 52-week lows. Again.
The table below shows every date when more than half the stocks were at new lows. Twice, they occurred in clusters during the worst meltdowns in 2008 and 2022. Three other times, they were mostly isolated to a session or two before a vicious rebound. Only the summer of 2021 and early 2022 dates showed a negative return over the next 6-12 months.
The selling pressure has persisted for a couple of weeks. On an average day over the past ten sessions, fewer than 25% of the stocks closed in positive territory. That ranks among the worst stretches since at least 2007.
That kind of selling pressure occurred a few times in the beginning stages of the decline and a few other times at the end. Even so, they all saw a rebound two or four weeks later.
The days with selling pressure have been almost all-in. There have been seven sessions in just the past month when fewer than 10% of stocks managed to rise.
There were only a couple of distinct precedents clustered in 2011 and 2022. The notable part of this is the tendency to see a rebound over the next couple of weeks.
Due to the persistent and heavy selling, long-term internal momentum is about as bad as it's ever been. The McClellan Summation Index for this group is below -2500, which is a horrifically lousy reading for any sector. Just absolutely brutal.
There were only a handful of days when it got this bad. In 2008, it triggered twice, both well below the stocks finally bottomed. It was a much better contrary signal in 2011 and 2022...for a while, anyway. While the amount of risk after these dates was absurdly high, they still showed a positive one-year return.
What the research tells us...
Over time, Chinese stocks have been about as kind to investors as gold stocks. They always seem to find a way to disappoint. Capital tends to flow toward investments that treat shareholders well, and those two groups of stocks are sorely lacking in that capacity. Even with that history, Chinese stocks have slapped investors particularly hard in recent weeks, and they are fleeing en masse.
By the time selling pressure has become as heavy as the last couple of weeks, tech stocks have typically been near an exhaustion point. Usually, the letup in selling has lasted at least a couple of weeks. A few times, it has marked a multi-month or even multi-year turnaround. But there was good evidence the stocks were at that point during the pounding in 2021. Then 2022. And yet, here they are again. At this point, relying on anything more than a short-term relief bounce requires faith. And anything investment that requires faith should be held with tight reins. Many of the stocks and related indexes enjoyed a reversal day on Tuesday, but those have had a poor track record of consistently preceding lasting gains.
Indicators at Extremes
Phase Table
Ranks
Sentiment Around The World
Optimism Index Thumbnails
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